The government is losing billions in VAT each year to tobacco smugglers and more resources are needed to tackle the problem, a key Commons committee says.
Many fake cigarettes come from the Far East and Eastern Europe
Customs lost about £2.9bn in excise duty in 2003-2004 and the figure is expected to increase in 2004-2005.
The Committee of Public Accounts also says the estimated 12 billion smuggled cigarettes increase health risks.
It urges a campaign on these risks but smoking groups say reducing duty levels would solve the problem of contraband.
"Tobacco smugglers cheat the taxpayer," said committee chairman Edward Leigh MP.
"Where they deal in counterfeit cigarettes, manufactured in the Far East and Eastern Europe from inferior quality tobacco, they are also subjecting the health of smokers to even more risk."
He said a campaign highlighting the health risks to the public could reduce the demand for fake cigarettes.
CRIMINAL TOBACCO 2003 - 2004
Illegal market for cigarettes valued at £2.2 billion
Hand-rolled tobacco valued at £700 million
12 billion cigarettes successfully smuggled
The committee report praises the former HM Customs and Excise - now part of HM Revenue and Customs - for reducing smuggling, especially in UK-made cigarettes.
It says it has helped to cut the market share of illicit cigarettes from 21% to 16% in the past four years, adding £2.1bn to government coffers.
However, the committee raises concerns about the increased smuggling of counterfeit cigarettes illegally manufactured overseas, which have a much greater profit and can be found at car boot sales, street markets and pubs.
Simon Clark, director of smokers' lobby group Forest, said the government could solve the smuggling problem "overnight" by reducing taxes on cigarettes.
"Instead, the Committee of Public Accounts wants to waste even more public money on a campaign to expose the risks of poor quality tobacco in counterfeit cigarettes," he said.
"The next step will no doubt be more Customs officers and more monitoring equipment to tackle smugglers which will consequently make life a misery for ordinary, cross-Channel shoppers.
"This is crazy, gesture politics that insults millions of hard-working taxpayers, many of whom resent their money thrown away like this."
Increasing tobacco taxation fuelled to record levels had fuelled smuggling and failed to significantly reduce the number of people who smoke, he added.
Conservative MP Richard Bacon, a member of the Public Accounts Committee, said the VAT lost on tobacco smuggling was 275 times greater than the debts of his local NHS trust.
Earlier this month, Southern Norfolk Primary Care Trust predicted a deficit of £10.5m.
In a separate part of the commons report, the committee says the government still needed to improve its VAT debt management systems. As of March 2005, businesses owed the treasury around £2.6bn.